To Build Outward or Upward: The Spatial Pattern of Urban Land Development in China

Transcription

1 To Build Outward or Upward: The Spatial Pattern of Urban Land Development in China Zhi Wang, Qinghua Zhang, Li-An Zhou December 12, 2016 Abstract This paper attempts to understand the special patterns of urban land development in China from the political economy perspective. Our study is motivated by an interesting fact observed in the past decade that the fast-growing Chinese cities witnessed outward expansion of urban land development with relatively low use intensity. We link this pattern with the career concerns of Chinese city leaders who act as city grand developers. We first develop a theoretical model to demonstrate how a city leader whose career advancement depends on city economic growth chooses the spatial pattern of urban land development. Two major testable predications are derived. First, city leaders with high career incentives are more likely to expand the city outward, which boosts more land sale revenues for financing public infrastructure and enhancing the economic growth. Secondly, the average use intensity of newly developed land is lower for city leaders with stronger career incentive due to the trade-off between a city s upward and outward expansion. We test the theory using a large dataset of residential land transactions matched with city leaders from 2000 to We find robust evidence consistent with the predictions of our model. Our study highlights the important role of city leaders in shaping the urban land development pattern. School of Economics, Fudan University, No. 600 Guoquan Road, Shanghai, , China. address: wangzhi@fudan.edu.cn, Phone: Guanghua School of Management, Peking University, Beijing, China, , address: Zhangq@gsm.pku.edu.cn, Phone: Guanghua School of Management and IEPR, Peking University, Beijing, China, address: zhoula@gsm.pku.edu.cn. 1

2 1. Introduction China has experienced a massive process of urbanization in the past two decades, which is unprecedented in the human history. According to the National Bureau of Statistics of China, the nation s urbanization rate increased from 26% to 49.9% during In this process 372 million of people, a vast majority of whom were originally from rural villages, added into the urban population. Urban built-up land area also expanded substantially, increasing at an annual rate of 5.73%, or 134,550 hectares per year during the period Such an astonishing scale of urbanization has been accompanied by tremendous growth of real GDP in cities. In the past decades of urbanization, China has revealed a very interesting pattern in land development. Figure 1 depicts the correlation between outward expansion of land development and population growth for China s top 50 cities during It is clear that the faster population growth is associated with more outward expansion of land use. For the same set of cities, Figure 2 shows that the cities experiencing higher population growth have lower floor-to-area ratio (FAR) imposed on newly developed residential land. Contrary to our common impression that heavily populated cities in developed regions such as New York, London, Singapore, Tokyo, and Hong Kong tend to build more intensively, China s intensely populated cities, such as Beijing, Shanghai, and Guangzhou, have much lower FAR than some second- tie or even third-tier cities like Xi an and Guiyang (provincial capitals of Shaanxi and Guizhou respectively in the western region of China). This paper attempts to understand the above puzzling pattern by investigating the political economy of urban land development in China. Chinese city leaders play a central role in urban land development. They act as city developers and set up the key parameters shaping decisions about how much new land is to be developed and where to develop, and how to regulate the intensity of land use such as the building density (i.e., FAR) for each land parcel (Lichtenberg and Ding, 2008, 2009). 1 This is in big contrast with the developed countries where homeowners have considerable power in influencing local land development. In the meantime Chinese city leaders, who hold a critical control over local economic activities, are placed in promotion tournaments for economic growth (Chen et al., 2005; Li and Zhou, 2005; Xu, 2011; Wu et al., 2013; Yao 1 Cai, Wang, Zhang (2016) and Brueckner, Fu, Gu, and Zhang (2016) show that the regulatory FAR are largely binding on residential development decisions in urban China. 2

3 and Zhang, 2015; Gong et al., 2016) in which their promotion is closely linked with regional economic outcomes (such as growth of GDP and fiscal revenues). In this paper, we link the peculiar pattern of urban land development we discussed earlier with the career concern of city leaders. We first develop a theoretical model to demonstrate how a city leader whose career advancement depends on city economic growth chooses the spatial pattern of urban land development. Specifically, she faces a choice of urban boundary (i.e., how far the outward expansion of urban land development goes) and land use intensity within the city reflected by certain regulatory FAR schedule. Her payoffs depend on her promotion likelihood, which hinges on both the ex ante career-concern intensity determined by her initial age and political hierarchy level while stepping in office, and the ex post economic performance during her term. If she has higher ex ante career-concern intensity, she will have stronger incentive to promote the city s economic performance since this can enhance her promotion likelihood and the expected payoffs more effectively. We assume that the city government collects land revenues from sales of the longterm leaseholds of land use rights to private developers, which is consistent with China s current land property institutions. The land sale revenues are supposed to finance the urban infrastructure construction, as is popularly done in China, and in turn to boost the local economic growth. Developing more land at the city edge (i.e., expanding the city more outwardly) can create more land sale revenues for the city treasury because the development costs are much lower at the city edge than near the city center. However, the land expansion is subject to the quota restrictions imposed by the upper-level government. As a result, the city leader has to exert greater efforts to bargain with the upper level government in order to obtain more quotas for rural-tourban land conversion if she wants to expand the city more outwardly (Xie, 2015). Such efforts may be rather costly to the city leader. Only those city leaders with high careerconcern intensity are willing to exert more efforts to seek more quotas from the upperlevel government, and exchange for the benefits from increasing land sale revenues and boosting local GDP. Therefore we would expect that city leaders with stronger career concerns will be more likely to expand the city outward. This is the first prediction of our model. The city leader also sets the density constraints of land use (i.e., regulatory FAR schedule) in the city. In doing so, she takes into account of the value of land considering various benefits and costs including the possible externality of high density 3

4 development. Our theory shows that, if we hold housing demand factors such as income and population constant, then the FAR schedule is lower as the city's boundary expands outwardly. This reflects a trade-off between a city's outward and upward expansion. Combining the first prediction of the model that city leaders with higher career-concern intensity tend to expand city more outwardly, we derive the second prediction of the model: city leaders with higher career-concern intensity tend to set lower regulatory FARs. Our empirical analysis utilizes the database on residential land transactions provided by the China Index Academy. The sample for our analysis covers over 30,000 completed residential land transactions (including residential mixed with commercial land) in 202 Chinese cities during and contains detailed information on prices, sale date, total area, FAR upper limits and location on each transacted parcel of residential land. The outward dimension of urban land development is usually measured in the current literature by the change in total urban land area (e.g., Brueckner and Fansler, 1983; McGrath, 2005; Deng et al., 2008; Lichtenberg and Ding, 2009). A serious limitation of the above measure lies in its inability to distinguish between urban land developments filling in open space among existing developments within the city boundary and those at the city edge that push the urban boundary further away from the city core. The latter case is precisely the outward expansion of urban boundary we are examining in this paper. Taking advantage of our micro-level land data containing information on geographic coordinates for each land parcel, we calculate the distance of each land parcel to the city center and develop a measure of outward development based on the top percentiles in the distribution of the distances to the city center of all the land parcels. We match the land transaction data with the personal data on city secretaries taking office in the 202 Chinese cities during the same time period. Based on each leader's initial age and political hierarchy level at the start of her or his office term, we estimate the leader s ex ante likelihood of getting promoted, independent of her or his ex post economic performance during the term, and define it as the leader's career-concern intensity. We then empirically examine the relationship between a city leader's careerconcern intensity and the spatial pattern of urban land development. We find that a onestandard-deviation increase in the leader's career-concern intensity leads to 11 km extra 4

5 outward urban expansion, which is a 41% increase relative to the sample average. According to our theory, the key mechanism that drives this positive relationship is a land-fiscal story. Specifically, through selling more land at the city edge, the city government can gather more land sale revenues, which helps finance the construction of urban infrastructure and in turn stimulates economic growth. We find evidence in support of the mechanism that an extra 12 km of average outward expansion of urban land generates extra land sale revenues of 10 billion RMB, and increase total local GDP by 45 billion RMB, amounting to 84% and 20% of their sample averages respectively. In addition, we find that that a one-standard-deviation increase in the leader's careerconcern intensity lowers the FAR level by 0.04, which explains 12% of the variations of FAR across city leaders. The above analyses focus on residential land because its sales accounted for nearly three quarters of total land revenues for local governments and land sale revenues are at the heart of our political economy story about the urban land development. As a supplementary analysis, we also examine the pattern of both industrial and purely commercial land development. We find that industrial land exhibits an outward expansion pattern similar to that of residential land; that is, during the terms of higherincentive city leaders, more industrial land is developed at the city edge. This evidence implies that the outward expansion of residential land complements with that of industrial land in promoting the city s GDP growth, which strengthens the logic of our political economy story. By contrast, purely commercial land development has no such pattern in regard with the local leaders career-concern intensity. There are very few studies in the literature examining the determinants of land development regulations in the developing countries (Gyourko and Molloy, 2015). Most relevant studies are set in the context of the developed world. Our paper fills in the gap. More important, the current literature emphasizes the idea that incumbent home-owners have incentive to influence the local planners to restrict land development in their neighborhood in order to keep their property value from falling down (Fischel, 2001; Glaeser, Gyourko and Saks, 2005; Hilber and Robert-Nicoud, 2013; Ortalo- Magne and Prat, 2015). The influence from developers neither shows up in their framework nor becomes the focus of analysis in this line of literature. 2 2 There are some studies that argue for the importance of local governments and business developers in urban development. Molotch (1976) proposes the idea of "growth engine" and highlights the close connections between local government officials and local business leaders which help make land policies 5

6 Our paper contributes to the literature by explicitly studying how city leaders as grand developers play an important role in shaping the pattern of urban land development. China s unique institutional background lays out an interesting context for us to explore this issue. Chinese city governments are responsible for stimulating local economic growth, providing public goods, and promoting urbanization. Because the promotion of city leaders is closely related to their economic performance, city leaders with strong career concerns will naturally adopt land development policies favorable for local economic growth. Different from the U.S., China s homeowners have relatively weak powers in affecting land use regulations. Our paper adds to the existing literature 3 by offering an important complementary channel through which land development regulations are determined. Moreover, our dataset has rich variations both across section and over time that enables us to identify the above channel. Our paper also relates to the literature on the role of local public finance in land policies. One frequently discussed motive for land use regulations in the literature is fiscal externality on the provision of local public goods (e.g. Epple, Romer and Filimon, 1988; Calabrese, Epple and Romano, 2007). More recently, Henderson and Venable (2009) demonstrate that revenues from land developing play an important role in the dynamic formation of cities. Using a panel dataset from coastal provinces in China, Lichtenberg and Ding (2009) find the evidence for the role of fiscal incentives in expanding the area of urban land. Han and Kung (2015) shows that fiscal pressures induced by the tax-sharing reform tend to push the urban land area to grow more in China. Our paper enriches this literature by introducing the role of career incentives of local leaders in driving the land sales and shaping land development patterns, and also by explicitly demonstrating the trade-off between upward and outward expansion of urban space. There is a small yet growing literature on land development and regulations in urban China (Deng et al., 2008; Lichtenberg and Ding, 2009; Brueckner et al., 2016; in favor of local economic growth. Logan and Molotch (1987) argue that urban growth machines, which combine real estate, banking, and commercial interests to support the expansion of the cities, are a typical feature of many U.S. cities. However, these arguments do not provide a formal theory or empirical analysis about the role of developers in the formation of land development policies. Sole-Olle and Viladecans-Marsal (2012) and Schone, Koch and Baumont (2013) find some indirect empirical evidence pointing to the influence of developers on local land development regulations in Spain and France respectively. 3 See Gyourko and Molloy (2015) for a comprehensive review. 6

7 Cai, Wang, and Zhang, 2016). However, none of these studies addresses how city leaders make decisions regarding urban land development policies. The rest of the paper is organized as follows. Section 2 is a brief description of institutional background on land development as well as on local leaders' career incentives in China. In Section 3, we present a simple theory that demonstrates the decision making of city leaders regarding urban land development. Section 4 discusses data and main variables. We present our main empirical results regarding the outward expansion of residential land in Section 5. In Section 6, we show the empirical results regarding land use intensity. Section 7 briefly discusses the development patterns of industrial and purely commercial land. Section 8 concludes. 2. Institutional Background 2.1 Regulations on Urban Land Development in China Land quota and urban growth control The 1980s and early 1990s had witnessed an unprecedented loss of cultivable land due to large-scale industrialization and urbanization. The sizable decline in cultivable land strengthened the central concerns about China s food security. 4 In the meantime, the conflicts between local governments and discontent farmers due to the insufficient compensations for the rural-to-urban land conversion have intensified sharply. In order to keep urban land expansion under control, the central government amended the Land Administrative Law in 1998 and enacted a new set of cultivable land protection provisions aiming at prohibiting any additional loss of cultivated land. In the same year, a new ministry, the Ministry of Land and Resources of the People s Republic of China, was established to strengthen the central government s planning control over land development. Since 1998, an urban land quota system has been implemented via a hierarchical, top-down planning process. The central government makes the nation s long-term plan of land development. The first plan covered the period between 1997 and The plan dictates the maximum amount of newly developed urban land for each province in the long run as well as the minimum amount of cultivable rural land in reserve. Given 4 At the beginning of the economic reforms, in 1978, the cultivated rural land per capita in China is only 1.55 mu, far below that of the U.S. 7

8 these two important constraints, provincial governments make their own long-term plans of land development and allocate land use quotas to cities under their administrative control. In addition, the governments at various levels also make shortterm (5-year or annual) land development plans which provide more detailed guidelines. The city governments make decisions regarding the size and location of land to be developed in a city. When land development involves conversion of rural land to urban land, it must get approval from the upper level government. If the conversion is within the quota constrains imposed by the upper government, then the application is relatively easy to pass through. Otherwise, the city government has to make extra efforts to lobby the upper level government (sometimes even the central government) for extension of the land quota. 5 When the land conversion is involved, the city government has to compensate the farmers who are currently using the land. By China s Land Administration Law, the total compensation fees should not exceed 30 times the average annual value of product generated from the land within the three years before the conversion. 6 This is typically far below the market value of land which can be 500 times higher than the compensation fees (Zhang, 2007; Liu, Chen and Zhao, 2012). Naturally, insufficient compensation led to the discontent and protest of farmers. However, in most cases, they are politically weak and have to obey the rules set by the local governments. This is why developing rural land at the city edge is lucrative to the city governments: they can auction off the land at much higher price after conversion. By contrast, brownfield development near city centers usually involves high compensation fees paid to urban residents close to the market value, which makes the net revenues from such development relatively low. The city governments have various ways to bypass the quota constrains on land conversion (Xie, 2015). They typically figure out legitimate reasons to persuade the upper governments to grant extra land use quota after their short term quota is used up. Such reasons may include opening a college town at the city edge, building a cultural and historic town which typically requires relatively low FAR or developing a hightech industrial park. As a result, the long-term land quota of land conversion has been 5 China s Land Administration Law (1998) requires that any conversion of farm land to nonagricultural use be approved by higher level authorities and be offset by conversion or reclamation of other land to agricultural use so that the amount of land in agriculture, adjusted for quality, remains constant (Ding, 2003; Lichtenberg and Ding, 2008). 6 The Law stipulates that the compensation fee can be increased more than 30 times the upper bound under some special circumstances. However, the local governments are generally unwilling to do so. 8

9 exhausted years before the end of the plan. For example, in 2004, Shandong and Zhejiang provinces had used up 80% and 99% of the total land quota of the long term plan of , respectively. The zeal of local governments for urban land placed tremendous pressure on the central government when making the next long-term land development plan. Meanwhile, the city governments actively engage themselves in lobbying and bargaining with the upper level governments for favorable treatment in the next long-term plan, which may effectively legalize their current urban expansion beyond the quota constraint set by the old plan. In addition, sometimes, the city government even tolerates some small scale land development at the city edge without any approval from the upper governments. In general, going beyond the quota constraint is possible, but at considerable costs, such as lengthy bargaining, proposing creative rationales for extra quota, and networking with upper level government officials. After rural land is converted to urban land, it is at the disposal of the city government. By law, all urban land is owned by the state. Since 1988, the use rights of vacant urban land have been allocated through leaseholds by city land bureaus. In the 1990s, most use rights allocations were done by negotiation between developers and government officials. To control widespread corruption in such negotiated land deals, the Ministry of National Land and Resources banned negotiated sales on August 31, Since then, all urban leasehold sales for private development have been conducted through public auctions. Land auctions are held by local land bureaus, with details of all transactions posted online and publicly available. All land sale revenues are turned into the city treasury. Land use intensity restrictions Now let us turn to regulations on the intensity of land use. The authority which is in charge of land use planning and general guideline setting is the city land reserve and allocation committee whose members include the city s key leaders and bureau directors from relevant government agencies. Apparently the city leaders have decisive voices in urban planning and land development strategies. After setting up the urban development strategies and guidelines, the committee typically delegates the routine decisions, such as use type and details of development restrictions (e.g., regulatory FAR limit, building height, green area rate, etc.) for each parcel of land to be auctioned, to the city s urban planning bureau. When designing land use restrictions, urban planning 9

10 bureaus aim to maximize the value of land by weighing various benefits and costs including the possible congestion costs caused by high density development. The FAR regulation is one of the most important land use regulations in urban China. By law, any land parcel must have a designated regulatory FAR level before it is to be auctioned off. Also, after the land is developed, the city s planning bureau is required to complete an official inspection of the residential project before it is put up for sale, in order to ensure compliance with the FAR regulation. In most cases, the FAR regulation takes the form of an upper bound constraint on the ratio of a building s total floor area to the lot size on which the building is to be constructed. As Cai, Wang, and Zhang (2016) shows, although the FAR constraints can be adjusted under certain circumstances, they are largely binding in urban China. Therefore, FAR regulations play an important role in shaping the urban spatial pattern of Chinese cities. We use the regulatory FAR upper limits to measure the land use intensity, which, intuitively, can be thought of as the upward dimension of urban land development. 2.2 Local Leaders Career Concern and Land-Finance Policies Prefecture cities are under the supervision and control of provinces. In China's centralized personnel system, it is the upper level committee of the Communist Party who determines the promotion of local leaders. The top leaders at the prefecture level include party secretary and city mayor and the party secretary is more powerful than city mayor due to the ruling position of the Chinese Communist Party. The regional economic performance is one of the key performance indicators for the superior to evaluate local leaders (Li and Zhou, 2005; Xu, 2011; Yao and Zhang, 2015). Since the establishment of mandatory retirement age in early 1980s, age has become critical for career advancement. When a local leader comes near the retirement age, he or she will lose the chance of promotion. This retirement system has been enforced rather strictly in the past decades. The retirement age varies with the hierarchical level of local officials. The retirement age of a prefecture-level official is 60 while that of a provincelevel official is This means that both age and hierarchical levels are important determinants of promotion, other things being equal. Given a local official s current age and hierarchical level, it can be well anticipated how far away she is from the glass 7 The political hierarchy level at which a city leader may stand include prefecture-level, deputy-province-level, province level or above. 10

11 ceiling of retirement. For a local leader who is far away from the glass ceiling, she should have high career-concern intensity. If she is going to hit the retirement age, she will have little incentive to work hard to improve the local economic performance. Since the late 1970s, China has gone through several waves of fiscal reforms in an effort to decentralize its fiscal system and fiscal management (Zhang and Zou, 1998). Fiscal decentralization led to the perpetually declining share of central fiscal income, which made the central government to turn this tide around. In 1994 the tax-sharing reform started and consequently 75 percent of value-added tax, the largest source of tax revenues, goes to the central government. Corporate income tax which was originally designated as local taxes in 1994 was reclassified as sharing tax between the center and local governments after As a result of repeated rearrangements of tax revenues in the favor of the center, local governments felt increasing fiscal pressures. Against this backdrop, land sale revenues rose to prominence and became the major source of extrabudgetary income for local governments. In the past two decades, city governments have increasingly relied on land leasing revenues to finance urban public goods provision such as infrastructure investment (World Bank, 2012), which in turn can help boost the local GDP growth. Some studies show that the ratio of land sale revenues to local fiscal revenues of prefecture city governments increased from 10% in 1999 to nearly 60% in 2005 (Han and Kung, 2015). It is worth mentioning that about three quarters of land sale revenues come from the sale of residential land. The city governments tend to deliberately lower the sale prices of industrial land in order to attract the entry of new firms which again may enhance the GDP growth. 3. A Simple Model In this section, we present a theoretical framework to demonstrate how city leaders make decisions regarding urban land development, from which we derive testable predictions. Our model assumes a mono-centric city with linear form. All workers commute to CBD to work. We assume free migration across cities. 8 A. Individual An individual worker s utility comes from the housing services, in addition to the 8 Adding migration friction to the model will not change the main predictions of our theory. 11

12 consumption of a composite good of all other commodities. An individual worker s objective function is as follows: max u( x( r), h( r)) x( r) h( r) x( r), h( r ) 1 st.., (1) w x( r) h( r) p( r) 2tr where xr () r indicates the location where the worker lives, hr () is housing consumption, is consumption of the composite good, w is wage income, t is commuting cost per unit distance, and pr () is unit floor area house price at location Solving the individual s utility maximization and considering the location equilibrium condition, we have r. where V (1 ) ( w 2 tr) pr () V is individual worker s indirect utility and, (2) (1 )( w 2 tr) hr (). (3) pr () B. Firm Assume the city's production is conducted by a representative firm. The firm's production function is where and L A is technology, G is labor; 9 G Y AGL, (4) is public infrastructure provided by the city government, improves the productivity of labor. We assume the firm sells product in the national market and there is free trade among cities. The product price is normalized to be 1. Prefect competition among firms gives zero profit, which implies that: w AG. (5) Eq. (5) pins down the wage rate. Suppose each worker provides 1 unit of labor. 9 For simplicity, we do not include capital in the production function because it is not the focus of this paper. One can easily incorporate capital into the model by assuming infinite elastic supply of capital to the city from the national capital market. This would complicate the model solution without gaining further insights. 12

13 When the labor market clears, L=N, where N is city s population size. C. Build upward: floor-to-area ratio Informed by the institutional background in urban China as discussed in Section 2, we assume the city government delegates some agent to set the floor-to-area ratio Fr () for land development at each location r. In making the decision, the agent aims to maximize the value per unit of land; that is, F( r) arg max p( r) F q( F) F. (6) F The construction cost per unit floor area is increases monotonically with F qf ( ). The construction cost qf ( ). For example, foundation costs may increase with the height of buildings. These costs may also include expenditures incurred in correcting the negative externalities such as noise and traffic jam rising from high density development. Note, the decision of FAR by the agent is similar to what a private developer would do (DiPasquale and Wheaton, 1996), except for that the agent considers the possible externality costs. Let the construction cost per unit floor area be q( F) F, 0. Then from (6), the optimal FAR level is pr () Fr (). (7) 2 D. Build outward: the benchmark case where the market determines the urban boundary Let us first look at the benchmark case where it is not the city government, but the market force that drives the urban outward expansion. In this case, the city government does not assume the role of a developer. Private developers choose which land to develop. They obtain land from its current user at the market price, denoted as pl (). Land at any location r is developed only when it can generate non-negative profits. Competition among developers bids up the land price at each location such that in equilibrium, the marginal revenue from developing land at each location equals the unit land price. The urban boundary S is thus determined by the following condition: p( S) F( S) q( F( S)) F( S) p ( S) p. (8) l 13

14 The left hand side of the above equation is the marginal revenues of urban land development at the city edge. The right hand side is the market price of land at the city edge, which is equal to p ; that is, the opportunity cost of converting agricultural land to urban use. In equilibrium, this equality must hold. The city government collects land sales tax at a rate used to finance urban public infrastructure constraint is G 0 l 0 0 t. The tax revenues are all. Then the government s budget S S S G t p ( r) dr t p( r) F( r) dr q( F( r)) F( r) dr. (9) Also note that in equilibrium, free migration across cities implies that V v, (10) and the housing market clearance implies S Fr () dr hr () N. (11) 0 Combining the above three equations (9)-(11) with equations (2), (3), (5) and (7), we can solve for the equilibrium for this benchmark case. Let us denote the equilibrium urban boundary in this benchmark case as S 0. E. Build outward: the planning case where the city government assumes the role of developer Now let us turn to the case where the city government behaves as a developer and sets the urban boundary. In making the decision regarding urban boundary, a city leader concerns her own pay-offs which derives from the success of her political career. If promoted, the city leader s payoff is K 0 ; otherwise, her payoff is zero. All the revenues from land development are collected by the city government and are all used to finance urban public infrastructure, G, which will improve the city s total factor productivity and boost GDP growth. Because more fiscal revenues can help her political career, the city leader has incentive to grab more revenues from land development. The net revenues from land development are equal to the total house value 14

15 subtracting the land compensation cost and construction cost. 10 Compensation costs are unavoidable in land development. Such costs typically include costs of demolishing existing structures and compensating current residents. In our model, we use a continuous function, cr () government s budget constraint is, to measure the compensation costs. As such, the S S S G p( r) F( r) dr q( F( r)) F( r) dr c( r) dr. (12) Developing land near the CBD usually involve much higher compensation costs close to the land market value than developing land far away from the CBD (Zhu, 2004). Thus, we assume that cr () decreases with r. Further away from the CBD, the compensation costs more and more deviate from the market value of land. In particular, at the city edge, to convert farm land to urban land, the city government only has to pay the farmers a compensation cost that is far below the market value of land (see Section 2.1). Thus if the city edge is still at the previous market equilibrium S 0, the LHS of equation (8) which is the marginal revenues from land development would exceed the compensation costs. 11 Intuitively, this will induce the city government who craves for more revenues to expand the city boundary further than Y Specifically, the decision process is as follows. Let us use the city s total output to capture economic performance in the model. We use a parameter S 0. to capture a city leader s career-concern intensity which depends on her personal characteristics such as age and hierarchical level when stepping in office. The higher is, the further away is the local leader from the career glass ceiling, so the leader concerns her career more intensely. As such, we define the city leader s promotion likelihood function as f( Y), with f '( ) 0. So the leader s promotion likelihood is an increasing function 10 In urban China, the city government is the monopoly supplier of city land. It holds auction to sell longterm leaseholds of land to private developers. Through competitive bidding, the land sales can grab the developers profits from land development. 11 For illustrative purpose, suppose the tax rate in the benchmark case and the compensation costs schedule in the planning case are such that the total government fiscal revenue of the planning case is the same as that of the benchmark market equilibrium if the city edge is set at S 0. Because the fiscal revenues are all used to finance public infrastructure, this means the productivity and wage income (see equation (5)) is the same in the two cases as well, which in turn leads to the same house prices and FAR levels (see equations (2) and (7)). Simple calculations then show the LHS of equation (8) is the same for the two cases. According to the definition of the benchmark market equilibrium, the LHS of equation (8) equals the land market value at the city edge S 0, Therefore, we can conclude that the LHS of equation (8) is higher than the compensation costs in the planning case. 15

16 of the product of her career-concern intensity and her ex post economic performance. 12 When the career-concern intensity is higher, improving performance can increase the leader s chance of promotion more effectively. The city leader faces a trade-off. On the one hand, expanding the city outward can bring in more fiscal revenues so as to finance public infrastructure and accommodate more people in the city, which in turn boosts GDP growth. On the other hand, pushing the urban boundary outward usually requires the city leader to seek more urban land quotas from the upper level government, which is costly. As discussed in section 2.1, when the central government realized that the costs of obtaining land at the city edge by the city governments were much lower than the market value of land, it started to make long-term plans of urban land development which set the quota of rural-to-urban land conversion for each province. The provincial government then allocates the quota across cities and over time. Such quota constraints are reflected by constraints on city s boundary S in our model. Suppose the provincial government sets the city boundary constraint at the benchmark market equilibrium boundary S If a city leader wants to expand the spatial boundary of the city beyond S 0, she needs to make efforts in lobbying the upper level governments. In this sense, such boundary constraints are not strictly binding and subject to costly bargaining. As described in Section 2.1, Chinese city leaders use various ways in practice to seek more quota and push the urban boundary outwardly. The lobbying efforts for more urban land quota are reflected in the effort cost function, denoted as E( S; S 0). We assume that these lobbying costs increase with boundary constraint S 0 S when the city expansion goes beyond the. Specifically, we define the effort costs of the city leader as 12 In China s political system, the likelihood of promotion of a politician hinges on both the politician s personal conditions prior to her stepping in office and her ex-post performance during the term. The two factors are complementary to each other. People may be concerned that a leader s effort may decrease with her ex-ante promotion chance when her ex-ante chance gets sufficiently high as documented in the literature on western political regimes (e.g., Besley, Persson and Sturm, 2010; Sole-Olle and Viladecans- Marsal, 2012). To explore this nonlinear effect of on the choice of the spatial pattern of urban land development by the city leader, we run regressions that include both and its quadratic term. We also draw non-parametric graphs of the relationships between the spatial patterns of urban land development and our measure of. We find no evidence of such nonlinear effect of prior promotion chance. 13 In our simulation, we suppose that the city boundary constraint is set by the upper level government at the benchmark level of the market equilibrium. Our model s main predictions are robust to other choices of S 0. 16

17 0, if S S0 E( S; S0 ) e ( S S ), if S S 0 0, (13) where 0, 0, and e 0. The city leader's objective function is described as follows: max f ( AGN) K E( S; S ) S st.. 0 ( i) G p( r) F( r) dr q( F( r)) F( r) dr c( r) dr ( ii) V v ( iii) S Fr () dr N 0 hr () S S S (14) In (14), (i) is the city government s budget constraint, (ii) is the intercity spatial equilibrium condition under free migration, and (iii) means that the total housing supply should accommodate the total housing demand. F. Solution and simulation Plugging equations (2), (3), (5), and (7) into (14), we can derive the first order conditions for S. With the first order conditions, we can solve for 4 unknown variables, i.e., S, G, N and Y. They fully characterize the equilibrium. Since analytical solution is impossible to obtain, we use reasonable parameters to conduct simulations. From simulations, we can do comparative statics and demonstrate how urban land development patterns are determined by relevant factors. Figure 3 shows that stronger career concerns drive a city leader to expand the city boundary more outwardly. Figure 4 helps us further understand the mechanism underlying such outward expansion. It shows a positive relationship between the city's spatial boundary and several economic outcomes in our model. The more outwardly a city expands, the more fiscal revenues, more population and higher total output. These will enhance the city leader s chance of getting promoted. In addition, the urban outward expansion has an implication on building upward intensity; i.e. the floor to area ratio. As a city s urban boundary expands outwardly, if we keep the wage and population of the city unchanged, individual people can have more housing consumption. This implies the individual s utility level increases. 17

18 According to eq. (2), the housing price at each location declines. As a result, the FAR level at each location decreases too, according to eq. (7). This reflects a trade-off between urban outward and upward expansion. In sum, we have the following testable predictions. First, city leaders with high career incentives are more likely to expand the city outward. The underlying mechanism that drives this is that by doing so the city leader can generate more land sale revenues for financing public infrastructure, which in turn enhances the economic performance. Secondly, the land use intensity is lower for city leaders with higher career incentive due to the existence of a trade-off between a city s upward and outward expansion. 4. Data and Variable Construction 4.1 Measures for the Spatial Pattern of Urban Land Development To characterize the spatial pattern of urban land development, we exploit the database on all the residential land transactions through public auction 14 provided by the China Index Academy, China s largest independent think tank focusing on real estate market. The sample for our analysis contains information on over 30,000 completed residential land transactions in 202 Chinese cities during For each land parcel, we know its use type, land area, regulatory FAR, reserve price, selling price, transaction date, auction type, etc. As for the outward urban development, we are essentially interested in measuring the extent by which a city s edge of urban land development is pushed further away from the city center. Taking advantage of the micro-level land data, we are able to do 14 The Chinese government passed a law in 2002 requiring all the land for business purposes (including residential, commercial and industrial land) to be sold through public auction. This law was strictly enforced since August We understand there still exist some land transactions through negotiated sales instead of public auction. However, we note that most negotiated sales involve industrial type land. Even for the residential land sold through negotiations, the sale price is far below the market value (less than 100 RMB per sq. meter). This suggests that such negotiated sales are not for the purpose of creating fiscal revenues for the local government which is at the heart of this paper s story. Thus our land transaction data from public auction is representative and suitable for the research purpose of this paper. 15 Among a total of 202 cities in the sample, 198 are prefecture-level cities, and 4 are provincial-level cities (i.e., Beijing, Shanghai, Tianjin, and Chongqing). 16 The original sample has 36,058 residential land parcels with completed sales. 5,229 land parcels are dropped because their regulatory information (e.g., FAR) is missing. An additional 11 land parcels are dropped because the information on their geographic location is not available. Finally, 801 land parcels are dropped because the information on city leaders is missing for these observations. The final study sample contains 30,017 residential land parcels. 18

19 so with detailed geographic locations of the city s residential land developments. Specifically, we obtain the geographic coordinates for each land parcel from Using the coordinates, we calculate for each land parcel the distance to the city center. 17 Panel A of Table 1 shows the summary statistics of land distance to the city center by land transaction time and by region (i.e., coastal, central, northeast, southwest, or northwest). More than half of the residential land transactions happened in the coastal regions. Around the country, the average and 90 percentile in the distribution of the land distance to the city center was 15.5 and 35.7 km during and increased to 25.3 and 63.2 km respectively in the period of , which indicates a marked outward expansion of the city boundary over time. Across regions, one can see that coastline cities in general have more outward urban development than the nation s average.. To investigate the relationship between outward development and local leader s career incentives, we measure the extent of outward development during the term of each city leader with the top percentiles in the distribution of the land distance to the city center among all the land parcels sold during the city leader s term. The outward expansion of urban land developments is a typical form of urban spatial expansion. Previous studies usually measure the expansion with the change of total urban land area (e.g., Brueckner and Fansler, 1983; McGrath, 2005; Deng et al., 2008; Lichtenberg and Ding, 2009). A clear limitation of such aggregate measures is that the growth of urban land may be caused by either new developments filling in open space among existing developments or those developments pushing the fringe of the existing urban boundary further away from the city center. Rigorously speaking the latter type of development is more consistent with the outward expansion of urban boundary which our outward measure can better capture; also, it is more relevant to our land-fiscal revenues story. In Table A1 of the appendix, we also check the correlation between our outward measure and other urban land area measures. The table shows that the increase in our outward measures are positively correlated with the growth of urban land area based on several widely used data sources, such as the Landsat images, the Chinese Yearbooks of Land Resource, and the Chinese City Statistical Yearbooks We use the coordinates of the 1992 light center (i.e., the brightest cell at night in each city s central area) from Baum-Snow et al. (2016) to identify the actual city center. They suggest that despite the enormous increase of light over the past two decades, the light centers have remained unchanged. 18 The Geography Institute of the China s Academy of Science provide detailed land-type information for all the cities nationwide based on the US Landsat TM/ETM images (a satellite remote sensing data) 19

20 We use the regulatory upper limit of FAR level for each land parcel to measure the land use intensity; or in other words, the extent of upward development. The regression analysis examining the relationship between upward development and local leader s career incentive is at land parcel level so that we can control for the effects of location attributes on residential building density. Panel B of Table 1 reports the average regulatory FAR levels by land transaction time and by region. In general, the average FAR has been increasing over time. Compared with interior cities, the coastal cities on average have lower regulatory FARs. 4.2 Measures for the Career-Concern Intensity of City Leaders In China, the party secretary of a city is the highest ranked city official who holds authority over all key decisions in the party, economic and social issues, while the city mayor, who has lower ranking than party secretary, focuses more on the daily operation of the city administration and policy implementation. As such, this paper treats a city s secretary as the city s leader. Chinese government officials are ranked by formal hierarchical levels which closely correlate with their political power and resources. By and large, promotion means moving from a lower level to some upper level. The hierarchical ranks the leaders of these cities can enjoy consist of four possible levels, in descending order: politburo, province, deputy-province, and prefecture levels. The hierarchical ranks of city leaders are correlated with the administrative status of the cities of which they take charge. 19 We collected information on 974 city secretaries who were in office during in the 202 Chinese cities matched with our land sample. The information includes the date of birth, education attainment, both the start time and the end time of office, hierarchical level at the start of office, and power status at the end of office (e.g., whether promoted, laterally moved or retired, etc.). Among the 974 city secretaries, at for the years of 2000, 2005, 2008, 2010, and 2013, from which we can calculate the area of all built-up area that is contiguous to urban settlements for the corresponding year. The Chinese Yearbooks of Land Resource provide data on the area of newly added urban land on the yearly basis from 2003 to The City Statistical Yearbooks report the built-up land area between 2000 and A majority of prefecture city leaders hold prefectural level, although a small portion of them hold deputy-province level. The party secretaries of four centrally administered cities, Beijing, Shanghai, Tianjin, and Chongqing, are mostly province-level (some of them are politburo-level leaders). The party secretaries of 15 significant cities (e.g., certain provincial capital cities and all separate-planning cities) usually hold deputy-province-level. The 15 deputy provincial-level cities are Qingdao, Shenyang, Dalian, Changchun, Ha erbin, Nanjing, Hangzhou, Ningbo, Xiamen, Jinan, Wuhan, Guangzhou, Shenzhen, Chengdu, and Xi an. 20